The Secret of Candlestick Charting - Louise Bedford

Chapter 11 - Seven Golden Candlestick Rules

It is time for you to be cast out amongst the other traders. The secret of the candlestick has been revealed to you, and you are ready to convert your new-found knowledge into money-making strategies. Here are seven golden rules to assist you in your future candlestick trading endeavours. 1) Assess the Meaning Behind each Pattern The candle graphically displays buyer and seller pressure. Candlesticks provide an insight into the collective mind-set of other traders. Rather than committing every signal in this book to memory, it would be far more effective to unravel the psychological principles that contributed to that candles creation. Each pattern displays its secrets to the trained eye. With experience, your ability to draw conclusions based on candlestick formations will improve. 2) Analyse the Lead-up to the Trigger Candle The lead-up to the trigger candle is equally as important as the pattern itself. A share must be trending for a reversal formation to be effective. If the share is not trending, the reversal pattern will not have a significant influence. The only way to decipher the likely share price action after the reversal appears is to analyse the lead-up, and then look for confirmation. 3) Watch for Appropriate Confirmation After the appearance of a trigger candlestick, it is essential to await confirmation prior to acting. To some extent, you will need to decide the amount of confirmation that you feel is appropriate based on the duration of your view, and your level of conservatism. Aggressive traders usually enforce a less stringent regime of confirmation prior to acting based on a candlestick pattern. Players who are more conservative may wait two or three periods. Confirmation is also suggested by using Western techniques, rather than relying on the candlestick in isolation. 4) Know the Term of Your View Usually you can expect a candlestick formation to affect the trading activity of between one and ten subsequent periods. If you are a day-trader, you will need to be incredibly proactive if you are acting based on a daily chart alone. It may be worth your while to find a real-time candlestick supplier. For traders with a medium-term view, candlesticks showing daily and weekly activity are usually sufficient. For longer-term players, a weekly chart showing candlesticks may be all that you require. 5) Do Not Use Candlesticks in Isolation Despite the insights that candlesticks provide, I suggest that you do not use them in isolation.

No indicator will provide correct signals 100% of the time. Even if someone had found the perfect system, the market is based on so many variables that it is unlikely this method will continue to be effective ad infinitum. Numerous methods result in an incredible success rate when dealing with the left-hand side of the chart. Unfortunately, we are not permitted to trade any trends that have occurred in the past. We must content ourselves with estimating future share price direction. If we are relying on a system that is over-optimised, based on past data, clearly it will show incredible clarity when we back-test. Yes, it will be completely capable of detecting turning points in the past, but how will it perform in the future? This is called postdictive error. It is an unfortunate consequence encountered by many rigid, inflexible systems. Remain flexible, and allow your system for trading to evolve based on new market information, but do not use this premise as an excuse for not following a system at all. The best traders utilise systems in order to minimise the effects of emotion while experiencing periods of pressure. Find just a few methods that you are comfortable with. Stick with those methods and give your system a chance to prove its worth before altering all of its inherent principles. If candlesticks are now included in your repertoire, this is terrific news, (I applaud your taste in indicators). However, if you do not relate to this method of analysis, there is no shame in that. Just find something that you do relate to, and use it consistently. If another method is more appropriate to your style, use it. 6) Apply Candle Addition to Multiple-Line Patterns If you are unsure about the bullish or bearish nature of a new candlestick, apply the process of candle addition. This will assist in showing whether a multiple-line pattern is likely to have a positive or negative effect on share prices. By reducing several candles to one line, the veil of confusion is often lifted. When you become fluent in candle-speak, you will be able to perform candle addition and candle development with speed and clarity. It is a skill that you will find very useful to develop if you intend to become proficient in candlestick analysis. 7) Back-test, Back-test and Back-test Each share has its own personality. The way a share responds to different candlesticks is fascinating. Once you attune your eye to patterns within a share chart, many revelations will become apparent. Some are very responsive to certain candlestick patterns. This observation will assist in future trading scenarios, and may lead to a higher probability trade based on a new appearance of the same pattern. For each instrument, look for the frequency of pattern occurrence, the immediate responsiveness to individual patterns, and the longer-term effectiveness of these formations. This process will provide some guidelines regarding how that share is likely to act in the future when a similar signal is exhibited. It makes sense to focus on a few shares, and develop expertise in these instruments. This will assist in your detection of appropriate patterns within these charts. If you spread your resources too thinly by actively trading a multitude of shares in the market, it is possible that you will miss valuable signals. Sun Tzu was a military genius who wrote a classic treatise entitled The Art of War. The principles in this ancient text are relevant whether you are planning a military coup, aiming for success in the boardroom, or desire to excel as a trader. The fact that his ideas

were expressed approximately 2500 years ago shows that these concepts have stood the test of time. One of his adages is: If you know yourself and your enemy, you will not fear battle. If you know yourself, but not your enemy, you will lose a battle for every one that you win; and if you do not know yourself and do not know your enemy, you will never see victory. This is exceptionally relevant for traders. I hope that the candlestick methods that I have shared with you have provided an insight into your own thought processes while trading. This is just as essential as having an understanding of the other players in the market and of market dynamics. Congratulations on taking the time to investigate the lucrative world of the candle. I hope that you will enjoy using this unique tool and that your profitability increases as a direct result. Happy trading!